Falling Oil demand and historically low prizes lead to deal to cut oil production

Oil prices dropped on Friday as traders feared that an Opec deal to slash global supplies by 10% would not offset a historic drop in demand due to the coronavirus outbreak.

The price of Brent crude fell nearly 2.5% to $31.82 per barrel on Friday last week, despite news that the oil cartel and allies – known as Opec+ – had reached a deal that would end a price war between Saudi Arabia and Russia that threatened to flood the market with more oil than the world could use.

Mexico initially cast some doubt over Opec’s plans, after apparently refusing to sign up to its share of cuts, which would have been 400,000 barrels per day (bpd). The country instead offered to cut 100,000 bpd.

The country signaled on Friday that the US may be willing to make further cuts to its production in order to allow Mexico to make less stringent reductions. Mexican president Andrés Manuel López Obrador said that US president Donald Trump had agreed to help out by cutting additional US output.

Major oil-producing nations collectively called the OPEC+, including Saudi Arabia and Russia, finally came to terms and agreed to cut oil production by 10 million barrels a day — equivalent to 10% of global oil supply — in May and June. Mexico had held out on the agreement on Thursday, but an intervention by the US resolved the standoff.

Crude oil prices have fallen by over 50% since the turn of the year, straining the economy of oil-producing countries and those invested in them. That was largely due to the coronavirus crisis in China and a standoff between Russia and Saudi Arabia — the former walked out of a planned production cut, triggering a price war. Then the pandemic spread around the world, sinking the demand for oil, even as Russia and Saudi Arabia were pushing cheap oil into the market. But now, pushed by the US, also a major oil producer, an agreement has been reached.

The agreement between OPEC and partner countries aims to cut 10 million barrels per day until July, then 8 million barrels per day through the end of the year, and 6 million a day for 16 months beginning in 2021, reports Associated Press. Mexican President Andres Manuel Lopez Obrador said he had agreed with US President Donald Trump that the US will compensate what Mexico cannot add to the proposed cuts.